Crypto Logs: geopolitics and digital assets

DOver the past few weeks, national and global events have brought more attention to cryptocurrencies. Both Russia and Ukraine have increased cryptocurrency applications since Russia’s invasion, which has highlighted some of the use cases for crypto (e.g. faster transfer times and more efficient and relative stability compared to fiat money in times of conflict). Meanwhile, as cryptocurrency takes off domestically, the United States has launched a Digital Asset Framework that could support crypto-related businesses, while facilitating wider adoption of digital assets. These developments have broad implications for the cryptocurrency landscape, as well as for the constituents of the Alerian Galaxy Global Blockchain Equity, Trusts & ETPs Index (BSTRING) and Alerian Galaxy Global Cryptocurrency Blockchain Equity, Trusts & ETPs Index (CRYPT). More details on these top March takeaways are below:

The United States establishes an encryption framework. President Biden signed an executive order on March 9 to establish national policies for digital assets. The order explores a broad framework that includes: consumer and investor protection, financial stability, mitigating illicit finance, promoting U.S. leadership in the global financial system, financial inclusion, and responsible innovation. (1)

  • Takeaways from the index: For many crypto investors, regulating cryptocurrencies seems counterintuitive given that Bitcoin was created out of the need to decentralize finance. But most viewed the move as positive for crypto-related businesses, especially crypto exchanges or crypto miners. A digital asset framework should support innovation in the US, especially compared to countries like China that have regulations in place to chase away crypto miners. Increased regulation of digital assets should also encourage wider adoption among institutional investors and businesses, which may not be able or unwilling to participate in the crypto economy due to the current lack of regulation.

Russia is exploring crypto as a way to avoid foreign manipulation. Western governments, including the United States, have frozen Russian central bank assets and imposed economic sanctions on the country. In response, the Russian Ruble (RUB) has already experienced rapid devaluation following the economic downturn. Before the conflict escalated, one US dollar (USD) was worth an average of 75 RUB, reaching as high as 135 RUB for one USD in early March.

  • Hint: Russia’s economic collapse has proven the effectiveness of sanctions as a powerful tool to isolate the economies of other countries. Going forward, governments may consider holding more digital assets, rather than fiat currencies, which are more easily manipulated by other foreign governments. On March 17, Russia granted the country’s largest bank, Sberbank, a license to issue and trade cryptocurrencies after it was blocked from transferring US dollars and other Western currencies.(2) Although the cryptocurrencies like Bitcoin can be affected by macroeconomic factors, they are less sensitive. currency devaluation as a result of geopolitical events.

Ukraine uses cryptography as a fast and efficient payment system. On March 17, Ukraine signed a bill legalizing cryptography. Ukraine has raised over $100 million in cryptocurrency donations since the Russian invasion a few weeks ago, including over $60 million going directly to the government’s official donation fund.(3)

  • Takeaways from the Index: Ukraine uses social media as a quick and effective method to reach a global audience, including creating an official government cryptocurrency donation fund. Cryptocurrency transactions are often faster and cheaper than traditional banking transactions which can take almost a day to clear when sent to foreign countries. And just like the situation with the RUB, the Ukrainian Hryvnia (UAH) has seen some devaluation since the conflict escalated, making Bitcoin and other cryptocurrencies a more stable option.

High volatility in the technology sector. The tech sector has seen volatility throughout 2022, with much of the uncertainty stemming from expectations of an interest rate hike by the Fed. While initially sold on fears of rising interest rates, the market is now experiencing some volatility after the Fed finally raised interest rates on March 17 and provided comments on the interest rate trajectory.

  • Takeaways from the index: While Bitcoin is generally not highly correlated to tech stocks, the majority of companies in the crypto industry (e.g. crypto exchanges, crypto miners) are early-stage tech companies and high growth. These indices have been largely affected by volatility in the tech sector given their high-tech weightings – CRYPTO holds a 45.6% weighting to tech stocks, while BCHAIN ​​holds a 39.1% weighting to the sector technology as of March 21, 2022 – and came under greater pressure than the two broadest tech stocks (as measured by the Nasdaq-100 or NDX) and Bitcoin (BTC).

Conclusion:

In March, interest rate concerns brought some volatility to riskier crypto-related stocks. But over the long term, there appear to be several emerging factors supporting the digital asset environment, including the US Executive Order on Cryptocurrency, Ukraine’s legalization of crypto, and Russia’s move towards digital assets.

the Alerian Galaxy Global Blockchain Equity, Trusts & ETPs Index (BCHAIN) is the underlying index of the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce (BLKC) ETF.

the Alerian Galaxy Global Cryptocurrency Blockchain Equity, Trusts & ETPs Index (CRYPTO) is the underlying index of the Invesco Alerian Galaxy Crypto Economy ETF (SATO).

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